The Health Care M&A Monthly: Onex Corp. Buys ResCare–

Pays $390.0 Million For Behavioral Services Provider

Canadian private equity firm Onex Corp. (TSX: OCX) made a bid in mid-August to acquire the remainder of ResCare (NASDAQ: RSCR). In the second largest Behavioral Health Care deal of the year, behind Universal Health Services’ (NYSE: UHS) $3.1 billion acquisition of Psychiatric Solutions (NASDAQ: PSYS), Onex is offering $390.0 million for this provider of residential and therapeutic care services to the mentally retarded, the developmentally disabled, the elderly and others.

Founded in Louisville, Kentucky in 1974, ResCare initially focused on providing residential care and training services to the mentally retarded and developmentally disabled (MR/DD). Over the years, it has added other business lines, focusing on providing services for disadvantaged people. The company now provides home care services to the elderly, runs job training services for disadvantaged youth and operates employment training services for welfare recipients and similarly placed job seekers. The company serves approximately 41,000 individuals in 36 states and Canada; many of its clients come from the Medicaid population. On a trailing 12-month basis, RSCR generated revenue of $1.57 billion, EBITDA of $98.2 million and a net loss of $11.0 million. At the time the offer was made, Onex and its affiliates owned 24.9% of the common and preferred shares of ResCare, so the Toronto-based PEG knew the company, its strengths and weaknesses. At first, Onex Partners III offered to pay $12.60 per share, or $370.0 million, for RSCR, but sensing some resistance, shortly thereafter raised that offer to $13.25 per share, or $390.0 million. This second price offers ResCare shareholders a 31% premium to the stock price the day before the first offer was made. Thinking the company may not get a better deal, RSCR has accepted OCX’s offer; however, the agreement does include a 40-day go-shop provision, which allows the company to solicit offers from other interested bidders. We cannot see in the current market many strategic buyers wanting to increase their exposure to the Medicaid population that RSCR serves, given the likelihood of Medicaid reductions. Even among those that may want to grow their market share in this demographic, two of the most prominent potential strategic competitors, Addus HomeCare Corp. (OTCBB: ADUS) and Providence Service Corp. (OTCBB: PRSC), both have balance sheet issues that effectively prevent them from mounting competing bids. If, however, RSCR does find another buyer, it is obligated to pay OCX a break-up fee equal to 2% of the equity value of the OCX deal. Which all brings us back to Onex’s bid. In effect, this deal may signal a departure from the recent rule of thumb that strategic buyers generally have a leg up on financial buyers. Over the past three years, many PEGs have held on to their cash, waiting for the opportunity and favorable market conditions to invest it. Want to read more? Click here for a free trial and download the current issue today